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MSMEs crisis: New Rs 1 crore payments default threshold for bankruptcy backfires

MSMEs used bankruptcy proceedings threat as pressure point to force big corporates to not delay payments for supplies

Nirbhay Kumar | June 23, 2020 | Updated 13:10 IST
MSMEs crisis: New Rs 1 crore payments default threshold for bankruptcy backfires
Government had raised threshold of default from Rs 1 lakh earlier to Rs 1 crore

KEY HIGHLIGHTS:

  • MSMEs fear big corporates will misuse new payment default threshold of Rs 1 crore for bankruptcy proceedings to delay payments
  • Government had decided to raise default threshold to Rs 1 crore from Rs 1 lakh earlier to prevent insolvency proceedings against MSMEs
  • Out of 6.33 crore MSMEs, 99.47% are micro, 0.52% small and 0.01% medium. Dues of bulk of these firms do not exceed Rs 1 crore
  • Resolution process under IBC had taken off well and saw good traction last year with around 43% of claims realised

A section of micro, small and medium enterprises (MSMEs) fear that big corporates can misuse new payment default threshold for bankruptcy proceedings to delay their dues.

Government had raised threshold of default under Section 4 of the Insolvency and Bankruptcy Code (IBC) 2016 from Rs 1 lakh earlier to Rs 1 crore as part of coronavirus relief measures.

While the decision was taken to shield businesses from bankruptcy proceedings, the MSMEs feel that means to pressurise big corporates to release payments on time have been taken away.

"IBC was becoming a potent weapon for small businesses to realise their dues from powerful corporates. I do agree it was prone to misuse in certain instances. Besides it was causing excess load on NCLTs (National Company Law Tribunals). However, the limit could have been raised to Rs 10 lakh and provisions added to prevent any misuse," said VK Aggarwal, Managing Director of Shashi Cables, a Lucknow-based medium enterprise.

Many other MSMEs are of similar view and maintain that a large number of enterprises are micro and small and their dues are within Rs 1 crore threshold. The change in default provision is disadvantageous to them.

As per the 73rd round of National Sample Survey (NSS), the total number of MSMEs are 6.33 crore and out of these micro, small and medium enterprises comprise 99.47%, 0.52% and 0.01%, respectively. Almost 96 per cent of MSMEs are proprietary.

"Most MSMEs are supposed to receive only upto Rs 1 crore (against supplies) from corporates. They used to use the IBC provision as a threat to recover their payments. Now, suddenly the Rs 1 lakh has gone up to Rs 1 crore. But there are no options given to the people below Rs 1 crore. Where will they go?" asked KE Raghunathan, former National President of All India Manufacturers' Organisation (AIMO).

The government had decided to raise the default threshold to Rs 1 crore to prevent insolvency proceedings against MSMEs in March.

"Due to the emerging financial distress faced by most companies on account of the large-scale economic distress caused by COVID 19, it has been decided to raise the threshold of default under section 4 of the IBC 2016 to Rs 1 crore (from the existing threshold of Rs 1 lakh). This will by and large prevent triggering of insolvency proceedings against MSMEs," an official statement had said on March 24.

Resolution process under IBC had taken off well and saw good traction last year with around 43% of claims realised. However, with the government now announcing that no fresh insolvency proceedings can be initiated for a year, the resolution rate is set to decline.

Federation of Indian Micro and Small & Medium Enterprises (FISME) General Secretary Anil Bhardwaj says that the development has to be seen pragmatically as it is in response to an emergency situation.

"Moreover, MSMEs which are suppliers to corporates are also beneficiaries of this decision otherwise their suppliers also could have taken them to IBC. Further, MSMEs' access to Facilitation Councils remains open. Then, TReDS platforms are becoming more important as all corporates above Rs 500 crore turnover are mandated to register and upload unpaid invoices of their MSME suppliers," Bhardwaj said.

Trade Receivables Discounting System (TReDS) is an electronic platform for facilitating the financing/discounting of trade receivables of MSMEs through multiple financiers. These receivables can be due from corporates and other buyers, including government agencies and PSUs.

Also Read: H-1B visa ban: Nasscom unhappy with Trump's work visa freeze

Also Read: Banks sanction over Rs 75,400 crore of loans to MSMEs under credit guarantee scheme

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